The Mozambican economic performance in 2003

4. The Accounting Framework: A 2003 Social Accounting Matrix

At this stage, we want to explore the Mozambican economy in order to capture its essential elements for utilisation in building CGE models. Then, we want to exploit the comprehensive framework of a SAM to address our empirical issue. In this way, we will easily be able to sum up the basic features of the economy and the relationships among different economic agents.

In a SAM framework, we may study the liberalization process by locating its effects on income distribution and production pattern changes. As Round (2003a) states: “[a SAM] connects the following aspects: the levels and distributions of incomes available to institutions (in particular households); the private and public spending of these incomes on goods and services (which are part of the determination of individual’s living standards); transfer payments and savings by institutions; the production of goods and services, and the generation of factor incomes”.

First, a macro SAM is built to generally quantify the size of the economy and the overall changes after the policy. Then, we profoundly study the economy and highlight its structural features. To briefly sum up the fundamental nature of this, we quote Tarp et al. (2002): “this SAM confirms the critical importance of high marketing costs, the sizeable share of agricultural production consumed on-farm, and the severe capital constraint, which inhibits marketed agricultural production particularly”. The disaggregated, or micro, SAM exploits information from the National Household Survey (2002/ 03 IAF), and permits us to divide the household account into two categories according to location (i.e. rural or urban). Furthermore, both from the IAF 2002/ 03 and from Labour Force statistics (2004/ 05 IFTRAB), we divide labour into three categories according to workers’ skills. Naturally, skilled, unskilled, or semiskilled workers should earn different wages and should be employed in different proportions in the activity sectors. For instance in the agricultural sector there should be more unskilled labour than in the service sector.

The primary sector is one of the leading forces in the development of the country. Although it counts only for 16 percent of the total GDP, it employs more than 80 percent of the total workforce. Its results, however, are affected by the country’s proneness to natural disasters, such as droughts and floods⁶⁹, and the remnants of the Civil War which left a trail of land mines in a large part of rural areas. The main sectors are food grains, sugar production, tobacco/ tea production, and cashew/ cotton production. Among these sectors only the one of cashews is stagnant even though it was recovered after the war’s end. Cashew nuts production is one of low quality and the exported crops do not result in high prices. An important consequence is poverty in rural areas. Rural farmers consider cashew nuts to be the most profitable crop. Generally, this is largely due to the small-scale farmers’ concerns about food self-sustainability for the coming year. Food grain cultivation has been expanded in terms of land cultivation because of an increasing cross-border trade of maize with Malawi. The tobacco and tea production has attracted Zimbabwean companies’ and farmers’ investments. The tea sector was seriously damaged by the Civil War which destroyed the highest producing region, Zambesia province. However, since the privatization of the tea growing and processing units, the sector has started growing again. Nevertheless, sugar production leads development since it is attractive for foreign investors. These investments are mainly due to the special protection policy they are subject to: this sector benefits from an exemption from sales taxes and a surcharge on sugar imports that reached 90 percent in 2003. Moreover, preferential quotas are offered in the U.S. market.

This sector features two main innovations: the former is the market integration inside the Country while the latter is the technological progress. The market integration involves the Northern, Central and Southern regions that until now have been self- sufficient due to high transportation costs⁷⁰ and poor communication.

As a result, prices in agricultural products converge across sub-regions and the percentage of smallholders selling food crops (maize and cassava) increases, especially in the maize segment. The final results of the 2002/03 IAF show that 66 percent of the agricultural products are self- consumed at the national level, although it reaches 69 percent in rural areas and only 52 percent in urban zones.

69 For these reasons, the production changes. There is the prioritisation of short cycles especially in the Gaza province in order to maximize production in a situation of rainfall uncertainty.

70 However, in 2003 the circulation of agricultural products has worsened as a consequence of the deterioration of infrastructures and damages mainly caused by the lowering atmospheric pressure (Delfina) and the Japhet cyclone.

The technological progress is not clear. Calculated in terms of employed fertilizers and chemical products, this progress has not given a unique result. The paradox has been represented by the cash crop segment (beans and potatoes) that remains underdeveloped despite use of fertilizers’. Because of the suppression of subsidized fertilizers, their employment has decreased⁷¹.

In the same period the depreciation of the Metical in the international context has raised their costs. Therefore the Government encourages the domestic fertilizer production and seeks international investments in this area.

One of the most significant features of the agricultural sector is the coexistence of a family and a business sector. The 2002/03 IAF demonstrates that nearly 87 percent of household are self- employed with only 16.4 percent working in the agricultural private sector. This affirmation restates what we have previously cited about own- consumption. For 95 percent of family workers there is no money remuneration but an in- kind transfer, mainly a part of their crop production.

The business sector contributes to the global sector’s production around 90 percent and in the marketed production 75 percent. Moreover, this sector employs only 10 percent of total capital value added and, supposing the rate of return of capital is equal across the sub- sectors, this means that agriculture in Mozambique is relatively low capital intensive.

Table 23: The agricultural production Unit of measure

Quantity

Basic food crops

Maize Ton 1,178,792

Sorghum Ton 190,820

Mafurra Ton 21,609

Unshelled rice Ton 117,483

Beans Ton 112,578

Batata Ton 877,165

Peanuts Ton 87,463

Cassava Ton 6,547,298

Cash crops

Cotton Ton 54,144

Raw cashew Ton 63,818

Sugarcane Ton 1,940,799

Leaf tea Ton 12,690

Citrus fruits Ton 30,000

Coconut husk Ton 47,600

Tobacco Ton 37,051

Sunflowers Ton 6,400

Source: MADER Mozambique, 2003 TIA (INE website, 2009)

71 A simple way to demonstrate this proposition is an analysis of the IO table, where the intermediate consumption of each sector is shown. From these data we derive that pesticides and fertilizers are mainly used in the forestry sector (nearly 40 percent of the total used pesticides), while for crops production they are not employed for crops other than maize, and only a small fraction (0.1 and 0.6 percent, respectively) is dedicated to beans and other basic vegetables (namely fruit and vegetables, and

The mining sector has rapidly developed and is sustained by the increasing extraction of products such as limestone, sand for construction, clay, riolite, and tantalite, which are used in the electronics and steel industry. At the same time, however, there has been a decrease in coal extraction and in raw bentonite because of old extraction equipment and the bad weather in the area of Cuamba, where the main mines are located. The projections for this sector demonstrate an increasing trend in production when the Pande- Temane Gas pipeline project starts operating. This will mean an increase in the production and a change in the internal composition since natural gas extraction will become a major division.

Nowadays, this sector employs less than one percentage point of the total national workforce and it is mainly composed of private companies (6 percent of them are involved in this activity). However Mozambique is rich in other mineral deposits: ilimenite, graphite, fluorine, gold, marble, granite, precious or semi- precious stones, asbestos, diamonds, apatilite, and beilite. Many of these have yet to be exploited.

Table 24: Mineral resources’ production

Unit of measure Quantity

Coal Ton 36,742

Bentonite Ton 24,627

Sand for construction Ton 1,372,032

Clay Ton 100,176

Bauxite Ton 10,250

Natual gas Gj 2,522,897

Source: INE website, 2009

The overall impact of the manufacturing and industrial production is positive but this trend is mainly led by the aluminium production that significantly increased after the beginning of the MOZAL project (along the Maputo- Johannesburg corridor) and more considerably after MOZAL phase II. This does not mean solely an increase in this segment, but it has positive spill-over on the overall transformation industry. This has been especially true for the metallic product industry, machineries and equipment. In fact, without counting aluminium production, these activities would have had a very negative trend. An example is the indicator of base metallurgy, where aluminium counts for 99.89 percent of the total production.

Furthermore, the positive trend is sustained by the food, beverage and tobacco segments that represent a large share in the total industrial production (more than 47 percentage points) structure but that has also benefited from the encouraging performance in the agricultural sector.

Bad performances have been in the textile and paper activities. In the former, the problem is that half of the productive complex is not operative while the ones that are still operational are reducing their production levels. As in the mining sector, the manufacturing activities employ only one percent of the total active population. However, the employment levels differ

across regions. In fact, industries are concentrated in the South of the Country where there is half of the total sectoral employment and especially in Maputo city (3.9 percent of the sector employment).

The service sector has not had a unique trend. In fact, the overall sector presented a positive trend in 2003. However, when disaggregating data, we can note some opposing performances. First of all the transportation compartment has had a positive result. Led by the road construction⁷² that offsets the negative trend recorded in the railway and pipeline segments, they all are still affected by the Zimbabwean crisis. The notably good performance of the construction sector is not only a result of political commitment in building infrastructure but is led by private sector construction with a high level of urbanization in the country as well.

Then, led by the positive results of the agricultural, fishery, transformation, and the extractive industries, the commerce sector has grown since there has been an increase in marketable products. The communication sector growth should be more robust than constant with an increase of only 0.3 percent over the previous year, especially taking into account the full privatization of the sub- sector.

This sector employs 14 percent of the workforce, mainly in the commerce activity, which counts for 7 percent. In the primary sector, there are 1.3 female workers for each male, conversely the service sector is mainly dominated by male workers (28.3 percent against 9.9 for female workers). Moreover, particularly in the commerce segment there is a concentration of workers in Maputo province and City where nearly 40 percent of the total sector workforce is employed.

Public utilities, electricity, and water are quite a different matter. Potentially, Mozambique could be the main supplier to the region thanks to its hydroelectric prospects. Nonetheless, the activity has recorded a downfall, mainly caused by modernization works at the “Hydroelectric de Cahora Bassa”. This decrease affects the export performance more than the production for domestic demand⁷³. Furthermore, this component has increased as a result of the economic growth and the rural electrification efforts. Despite the natural endowment of electricity, Mozambique imports part of its power need. This is caused by the localization of the Cahora Bassa plant that is too far from the Southern provinces and especially from Maputo City

72 Road construction and maintenance are two pillars of the Mozambican developmental strategy included in the PARPA.

whose higher electric requirement is satisfied by South African imports. As previously cited, there is a huge amount of Mozambican electrical exports. Their destination is South Africa.

For a long period this trade was unbalanced: Mozambique exported electricity and imported it at double the price.

After this brief introduction on the Mozambican economy, we must focus on two peculiarities that are fundamental for the SAM building: own consumption and marketing margins. These two phenomena are largely correlated and one explains the other. One of the startling features of the Mozambican economy is the presence of high marketing margins that change the farm gate price from the final purchaser’s price⁷⁴ sensibly.

This wedge changes across sectors and may reflect a wide variety of arguments: a certain degree of imperfect competition, poor infrastructure level and therefore difficulties in trading, or a high cost of capital⁷⁵ (Arndt and Tarp, 2000). As Arndt et al. (1998) showed, these margins are connected both to domestic transactions and international exchanges. Domestic transaction, as previously mentioned, does not mean solely the whole output produced domestically but it takes into account another important feature of the economy: own consumption⁷⁶.

This means producers consume part of their production, especially in the agriculture, livestock and fisheries sectors and in the food processing sector. The motives are to maintain food security. To strengthen this concept we may take into account the cassava productive sector. It is composed both of a formal sector and an informal one, both of which contribute to

74 This characteristic has an historic grounding. High marketing margins were introduced during the Portuguese colonialism when prices of a wide variety of commodities were set by Government according to commodity types, processing stages and final uses. After the independence this centralized price system was maintained with the establishment of a series of state- owned marketing boards, each one for a different kind of commodity, that acted as wholesalers. For instance, in the 1960s the Mozambican government funded a state marketing board for cereals. Although, the presence of marketing boards in Africa is quite common, the Mozambican ones were characterized by a price control not only on the exported goods, but also on domestic transactions.

75 Gohin A. (2000) highlighted “four main types of marketing services” that we may classify as:

“transport activities, storage activities, wholesale trade and retail trade”. Moreover in the last sector (i.e.

retail trade), Betancourt et Gautschi (1992) said “accessibility of location, assortment, assurance of production delivery in the desired form and at the desired time, information, and ambiance” are collected.

76 As the 2002/03 IAF (INE, 2003d) demonstrates, home consumption is mainly a widespread rural phenomenon.

total production for less than 1 percent and 99 percent, respectively. Additionally, the total own consumption counts for 73 percent while the marketed production is only a quarter of the total production. Only in this small fraction may marketing margins be applied since, by definition, own consumption avoids marketing margins. At this stage we may briefly describe the trade service sector, how it acts, and its weight in the economy. Trade services are produced by two different activities that reflect the various nature of the marketing margins.

Together with a pure marketing margin that counts for the highest amount (nearly 97.40 percent), a part of these margins is caused by transportation costs⁷⁷. This sector provides 12 percent of the total domestic production, nearly 20 percent of total capital value added and 11 percent of labour value added. This is a demonstration of Arndt and Tarp’s (2000) affirmation

“the commerce activity, which provides marketing services, is capital intensive. […] Due to the capital intensity of the commerce sector, returns to capital have a strong impact on marketing services prices”. From many sources, we derive that marketing margins are particularly high for the agricultural sector and for the food processing sector, while by definition, they are zero for services.

For the year 2003, we deduce that the general features in the margins’ distribution still held. In fact, if we consider the agricultural sector and the food processing we had nearly half of the total marketing margins in the economy while the manufacturing sector, as a whole, had a lower margin rate. Moreover, it is worth noting that basic food crops, grains and cassava counted for more than 12 percent, nearly as much as the fuels and chemical sector which produced more output and included a wider range of goods. Under deeper scrutiny, the higher margins in the agricultural sector appear higher if we consider that in this sector there was a high level of own consumption. In other words, more than half of total domestic production (considered both in the formal and the informal sectors) was consumed inside the productive units⁷⁸ and the total margins could be applied to a smaller output volume since own consumption avoids marketing margins.

77 This transportation costs are not associated with transport in general but with goods transported by road. This means that it is mainly part of the domestic margins since it is well- known that the infrastructure level inside the country is very low. As Tarp F. et al. (2002) shows, the only developed road system is the so called east- west corridor linking Maputo, Beira, and Nacala to the landlocked African countries, South Africa, Zimbabwe, and Malawi. Infrastructure in the north- south direction is poor, rail links are lacking and permanent roads minimal. It makes agricultural goods’ trade more expensive and food shortages in the South more frequent.

78 In this case with the definition “productive units” we mainly define small- size family farms where family components work and earn no monetary wages but an in- kind transfer, as the final results of

This means that the margin per unit of output is higher. Tarp F. et al. (2002) demonstrated that in these sectors margins a wedge of at least 50 percent from the farm gate price and the final consumer’s price could be created.